Distressed property buyers expect prices to drop

Nearly one-third of distressed property purchasers expect home prices to decline in their local market this year, this sentiment almost doubling from last year, an Auction.com survey found.

Most of the respondents are likely to observe those falling prices as an opportunity, with 87% declaring they will maintain the same level of or increase purchase activity in 2023; this was up one percentage point from the year-ago survey.

"Local community developers buying at a distressed property auction are on the frontlines of the housing market and provide a reliable barometer for emerging real estate trends," said Jason Allnutt, Auction.com CEO, in a press release. "They are telling us 2023 will bring further home price declines in many areas but also increased opportunities to convert distressed properties into affordable housing supply as prices adjust to a new market-driven equilibrium."

The report is based on a March survey of nearly 450 distressed property purchasers that used the platform to make a buy at a foreclosure or real estate owned auction in the past four years.

The survey found that 32% of respondents expect prices in their local market to decline; this compared with 17% in the 2022 report.

Various indicators of home values find that growth continues to slow. In the first quarter, home prices grew on an annual basis by 4.3%, well down from 8.4% in the fourth quarter and nearly 19% below one year prior, the recently released Federal Home Finance Agency Home Price Index found.

However, looking at the quarter-to-quarter change, the 0.5% increase for the first quarter topped the 0.3% rise for the fourth quarter of last year.

CoreLogic data for March found home prices declined in 10 Western states, leading to the smallest nationwide annual increase in almost a decade, at just 3.1%.

But even with the increased negative view, 42% of this year's survey said their local market was overvalued with a possible price correction likely, down from 55% in 2022.

While over three-quarters of buyers described themselves as community developers or individual investors — 77% versus 84% in 2022 — a growing share are owner-occupants. In this year's survey, 15% of the purchasers did so with the intent of living in the property, compared with 8% in the 2022 report.

Current housing market conditions with the inventory shortage is one of the factors behind the increase in people buying these homes but a change in Federal Housing Administration policy also helped to drive the change, said Daren Blomquist, vice president, market economics at Auction.com.

The lack of homes to buy and rising interest rates, are leading consumers to look outside of the box and consider participating in foreclosure auctions.

But it is a buyer-beware situation, with both obstacles and additional risk. "Namely, most auctions require buyers to pay in cash, and many do not allow buyers to inspect the interior of the property before purchase," Blomquist said.

Then a year ago, the FHA made a change to its Claims Without Conveyance of Title program giving potential owner-occupants and nonprofits a 30-day first look advantage to bid on properties.

"Thanks to this policy change, Auction.com started holding these first-look auctions in August of 2022, and we've seen a sharp increase in the number of owner-occupant buyers taking advantage of that first look period," Blomquist said. "The number of first look buyers on Auction.com increased sevenfold between Q2 2022 and Q3 2022, and we have had as many first-look buyers in the first half of 2023 that we had for all of 2022." 

Over nine in 10 of the first look buyers from those auctions were owner-occupants, he said.

Institutional investors made up 4% of the purchasers and the remainder was classified as other, including non-profits and real estate brokers.

Still among buyers, while fix-and-flip is the primary purpose, more are adopting the renovate and hold in order to rent strategy, largely because of their expectations of declining home prices, Blomquist added.

Approximately half the respondents plan on reselling the property, down from 61% in last year's survey, while those willing to hold grew to 39% from 32%.

One possible explanation is that a significant number of those surveyed, 38%, expect rents in their local market to increase by more than 5%. On the other hand, just 16% looked for rents to decline. That is what makes renovate and rent a safer investment strategy for them, Blomquist said.

Making money is the leading motivation for those investing in these properties, cited by 80% of the respondents as one of their top three reasons.

Creating generational wealth was second at 68%, followed by improving neighborhoods at 47%. Tied for fourth on the list were expanding homeownership and providing affordable housing, each at 38%.